Peru: Infrastructure gap put at $88bn

Latin America | 18 Dec 2012

Decades of strong growth in Peru are generating a wealth of opportunities for international investors, but have also resulted in a multi-billion-dollar infrastructure gap that may take almost a decade to close.

Hailed as one of Latin America’s success stories, Peru recently earned itself 43rd place from 185 countries in the World Bank’s 2013 report for ease of doing business.

While major investment, particularly at the country’s ports, is helping to reduce the infrastructure gap, concern is mounting that the challenges facing investors, led by Peru’s bureaucratic legislation and land title issues, will further delay new projects, putting the economic development at risk of stalling.

The failure of large-scale investment to keep up with the fast pace of growth in Peru was highlighted in the 2012 Global Competitiveness Report published by the World Economic Forum, which rated the country’s macroeconomic environment as the 21st-strongest in the world, but gave it a much lower ranking, at 89, for the quality of its infrastructure. Peru placed 61st overall in the report.

Lack of infrastructure is damaging both exporters and the industries that have contributed to the decades of boom, according to Juan Varillas, president of the Association of Exporters (ADEX). “Due to insufficient infrastructure and lack of adequate investment, the export sector faces added costs, which in turn affect its productivity and competitiveness,” he told OBG. “Peruvian exporters currently face a 25-30% added cost in logistics, which severely detracts from the country’s competitiveness.”

A recent report commissioned by the Association for the Promotion of National Infrastructure (AFIN) and published by Lima’s Universidad del Pacifico and ESAN business school put Peru’s infrastructure gap at $88bn until 2021. The figure equals roughly 33% of GDP and is significantly up on previous estimates made just a few years ago that calculated the infrastructure gap to be around $36bn. The report said strongest demand for projects would come from the energy, transportation and telecommunications sectors, which required investment of $33bn, $20.9bn and $19.2bn, respectively.

Peru’s ports are already playing a key role in helping to close the infrastructure gap and strengthen Peru’s role as a regional hub. The global operator Dubai Ports World, which set up operations in 2010 at its south terminal concession of Peru’s Callao port, has plans to develop its business following an initial $300m investment. A second global operator, APM Terminals, announced in 2011 that it would be investing $750m in its concession for the north terminal over a 10-year period at Callao port.

The government hopes to attract new investment for its many transportation projects, particularly development of the highway network. While the network has already attracted significant investor interest, its further development remains a priority for the government and forms a key part of its plans to extend economic expansion beyond Lima.

However, challenges, such as a lack of land titles and the lengthy state expropriation process, still risk delaying the rolling out of large-scale infrastructure projects. Land reform carried out in the middle of the 20th century has left the country largely fragmented, with many physical title records non-existent. While efforts have been made to repair the title system over the years, problems persist due to complications such as lack of ownership or multiple ownership claims.

In an effort to cut red tape, the country’s cabinet council recently approved a draft law facilitating a faster process for the expropriation of land for projects deemed to be in the national interest. The law permits the government to raise offers to owners for land and more easily expropriate land where agreements have not been reached.

The law has been welcomed by key players in the construction and infrastructure industries who regard it as a sign that the government is willing to take bold steps aimed at galvanising the country’s development. Observers add, however, that further government action will be required if Peru is to move towards putting in place sufficient infrastructure for economic growth to be sustainable long term.